You are listening to Redefining Energy. Your co hosts from Berlin Gerard Reed and
from London Laurent Segala. Today on Redefining Energy, We're going to talk about
China and to paraphrase Winston Churchill, a riddle rupped in the mystery inside an
Enigma. But first award from our partner, Redefining Energy sponsored by a Mundi,
the leading European asset manager, your trusted partner to accelerate the transition to
a low carbon future. Leading asset manager based on the IPE ranking. Investing
involves risk, consult your financial advisor. That is well said Laurent. That
is well said. Great way to open up the podcast. China. It
is the renewable king of the world in every way and you can't ignowre it.
So we did a little minutes it's one nine two months ago, and
we said we would bring a real expert. We have the real expert.
Yeah, and I'm really looking forward to this conversation. Ron Our guest is
David Fishman, is an American expert, but he's based in Shanghai. Of
course, he is totally different in Mandarin and is part of a conceptancy called
the Lantau Group Economic and Strategic Conceptancy with amazing knowledge of the energy space,
absolutely phenomenal. Is the only guy who reads all the provincial statistic in Chinese.
Well, let's bring him on the show. David. It's great to
have you on the show. Thank you for having me. Well, David,
you're in Shanghai, so you're in the thick of it, and we're
going to talk about China and energy, which is such a great topic.
But you know, first, up from the outside looking into China, we
see Cole is going ups, are going up there gets their plants. There
are provinces who are doing something, some kind of government doing something, subsidies,
over capacity, market forces, common ecod any. First question, is
there a pilot in the plane? I suppose that's a pretty fair question,
considering maybe you get some mixed signals sometimes, but yeah, absolutely so,
we've got a plane. It's flying in a direction. Now we know the
direction because national policy tells us what direction the plane is flying, but a
lot of the details maybe are a little bit fuzzy. You know, what
is the altitude of the plane, what is the speed of the plane?
Is it going at this bearing or that bearing? And so yeah, you
can get some conflicting signals. Sometimes it's reasonable to say, from the outside
looking in, maybe it looks like the plane doesn't have a pilot, so
to speak. But there is a national strategy behind China's energy transition, and
so yeah, the plane very much does have a pilot right up from the
outside in. I find very interesting about the Chinese energy strategy is they seem
to industrial policy, geopolitics. They look at a much broader sense than we
do in the West. If I might say, that's fair to say Chinese
climate policy or environmental policy, right, we talk about affecting an energy transition
or creating some type of intentional movement in your energy systems or your electricity system.
Of course that's a domestic choice. That's a domestic policy choice. When
it comes to energy, it's kind of completely inextricably linked to international policy as
well. If you want to have a domestic industry that's competent at building solar
panels or electric vehicles or building ultra high voltage lines, right, you have
to have an effective industrial policy. And if you're going to have effective industrial
policy and you're trying to ramp up into technologies that maybe you didn't have a
lot of expertise in before, or maybe you're cutting edge for the whole world,
then you're also going to have to touch on geopolitics for sure. And
where China is right now, of course, for capacity has been in the
news a lot recently. We're talking about evs, we're talking about solar panels.
That all becomes very sensitive topics. China is really really pushing its own
domestic energy transition, and maybe a lot of people are reading that as intentional
trade based attacks as well. It does seem like there's going to be surplus
sometimes absolutely Now is that a problem that's up for you to decide personally?
My own thought on clean technology is that as long as the world's still using
fossil fuels, there can never be an oversupply of clean technology. But maybe
that's a question for the trade folks rather than me. When we look at
older developments, and of course twenty three was a record YEO for winds or
our batteries, and to twenty four probably even more, the question while asking
ourselves is how much is took down decided? But you see on how much
is the consequences of market forces? They are the prices on what. It's
just the markets. So how does it work? And that's a very fair
question because it's been an evolution in the early years of China's wind and solar
buildout that couldn't exist without extreme government participation, support, or you might even
say interference with solar and wind buildout. That you have to be able to
say to a wind or solar developer, if you build this, and look,
I know it's expensive, I know capex is high, I know solar
panel technology is expensive. But if you build this, I'll give you a
very high feed in tariff, I'll give you subsidies, I'll give you everything
that you want so that you can build this thing and be successful. And
then over time those subsidies were pulled away, those very attractive feed in tarif
rates were reduced, and starting around twenty twenty, the law of the land
instead was hey, if you want to build, you better be able to
do it at grid parity prices. You're not going to get a scent more
than you would get as if you were a coal fire generator. And you
know what happened. The renewable generator said okay, and they kept building because
the market conditions have been evolving in such a way that they see the way
to economic profits. They aren't being told to build anymore, or they're not
being lured with very very attractive government carriots. But it's neither stick nor carrot.
The government didn't create the stick or the carrot in this case. At
this point, China has built a power market, has built a power market
that is able to incentivize renewable builders to construct projects that they know we're going
to earn acceptable revenues on the basis of just market forces, that they're going
to earn enough money in an open market, in a merchant market, so
that they want to build. And in the last couple of years, twenty
twenty three huge numbers, twenty twenty four looking like it's going to be a
huge year also, all of that really being driven by builders seeing that they
can make money by building these projects, by build than wind and solar farms.
David, I just wanted to ask you a little bit about the demands
side. If I'd look at Europe or North America where we just have electricity
demand flat, talking a little bit about that power consumption is still growing like
crazy in China. We saw in March, which is the most recent month
I looked at March twenty twenty four, it was up a seven percent year
on year. These are the numbers that you would see from a developing economy.
And when you see the rate at which China is adding power consumption,
it really underlines the fact that China often tries to make that we are still
but developing economy, that we have not matched out our potential. When you
look at the per capita consumption of electricity across the country and you compare that
to OECD nations, we're looking at much much lower levels. And then remember
a lot of that includes industrial electricity consumption. You strip that out and you
just look at how Chinese people consume electricity compared to how European people or American
people households. It's a fraction, it's like a fourth. They use so
little electricity in Chinese households compared to their peers in developed nations around the world.
And so that's how China can still have five percent, six percent,
seven percent consumption growth every single year. And that's what really highlights how difficult
it is to be able to affect an energy transition when they're trying to cap
how much coal they use. Trying to tap emissions but also keep growing the
pie. They need to stop how much coal is in the context of the
overall pie, but still allow the pie to keep growing at six or seven
or eight percent every year. Author economies they only have to do with one
issue. They're swapping, right, They say, we take the carbon intensive
electricity that we have, we take the fossil fuels in our oil and gas
in our transportation sector. Can we swap it out? Great? China is
trying to both swap and grow and ensure that the stuff that's growing is also
cleaner. It's a massive, massive challenge in terms of CRISI market, which
is something we are very attuned to in the US. So all the markets,
like by province, is their national market. How does it work?
Chinese power sector is mostly unbundled. So you have generators and they do their
thing. You've got transmission distribution companies, the grid company, they do their
thing, and then you've got the retail what we call maybe the utility in
the West, and they sell electricity to power consumers. These have mostly been
split out now in China. So you've got your three separate sectors generation,
transmission, and retail and then every single province has its own local grid,
and so it will have local generators, local transmission, and local consumers.
But then each provincial grid is part of a regional grid. So each regional
grid will have maybe four or five provinces, and they're kind of loosely linked
to each other. They have interconnection. You can compare it maybe to like
an RTO in the United States, but then on a national basis or across
regional basis, very weak interconnections. So China's got a total of six regional
grids. One of them is kind of an island all by itself, that's
china Southern Grid down in the south. And then the other five regional grids
they talk to each other a little bit. Maybe they can send some power
across country with high voltage lines something like that, but maybe it's better to
think of themselves as big islands. And so that's the current state of Chinese
power markets. You've got power trading happening, You've got buying and solving electricity
from generators to transmission to retailers, and it's happening mostly on a provincial level,
a little bit on a regional level, and only in kind of a
supplementary sense on a cross regional level. Can I specifically ask you about one
technology and that's solar? And if I just look at the solar installs in
China last year, I think there were two hundred and sixty gig and wants
something like that, but that was more that was installed in the whole world
the year before. And those numbers are just so big. I just sort
of scratched my head and said, what how many years can they keep roll
at that level? Right? And on the top of that, and that's
why we're glad to have you on the show. You have to figure out
that there was a gap in trucking electricity because they don't even count the sol
hooftop, and that's something that you pointed out recently on social media, So
job it even goes further than you think because they don't count so hooftops and
small installation. Probably start with that and then comment more generally when you look
at what's out there for solar. What's really notable about China is how massive.
Yeah, sotally two hundred and fifty gigawats of one year, and you
know half of that's distributed solar rooftops. Now, so you've got your massive
utility scale projects, just deserts full of solar panels out in the Gobi Desert
in the western half of the country, and then you've got one hundred giga
wants are more of rooftop solar panels in the eastern part of the country where
land is scarce and at a high premium, and building on rooftops makes a
whole lot of sense. Even if the solar array dance isn't great in that
part of the country, it more than makes up for itself on the basis
of the rooftops being available and land being very scarce and expensive and not so
available. So yeah, they're building tons and tons of solar on rooftops.
A lot of these projects. I mean we're talking small projects, right.
It's easy sometimes that they might not even be counted in the overall totals,
and especially a lot of their generation. Because of the way China's National Bureau
Statistics tracks generation, it has to have a cutoff point. You can't be
hoping on a monthly basis to collect all of your statistics from what at this
point are probably tends to hundreds of thousands of individual projects. And so they
have a cut off point and they just say projects that make less than this
amount of money, they're just not tracked in the statistics, and they make
it up. At the end of the year, they do a more thorough
survey and they try to understand what they actually have out there. But on
any given month, when they say we got this much generation from our solar
in this month, it's more. It's always more because they're missing a bunch
of their smaller, you know, the rooftop solar projects. And then how
long can they keep it up. They've clearly got the capacity to build the
panels, they've clearly got the workforce to install the panels. These are actually
some of the bottlenecks that other country's experience. They've clearly got the will from
the builders to keep building because they still see a path to profits by building
these projects. So how long can they keep building it? Well, the
real thing they're going to run into is not the will of the builders or
some supply chain issues. They're going to run into grid stability issues when you
build that much intermittent generation entering into your system all at the same time,
and it's solar, so it all goes away at night and it all gets
affected when the sun goes behind a cloud all of a sudden. You've got
a system that's really, really reliant on a highly intermittent generator, and so
what do you have to do to keep that up with that? You've got
to build more transmission and distribution lines. You have to build more flexible generators,
load following generators that can keep up with them. We're talking flexible coal,
We're talking gas turbines, pumped hydro storage, battery storage, demand response
systems. You have to build a market that actually allows all of those things
to function. You need an insular services market, you probably need a demand
response market, you probably need a capacity market. You need to build all
of these things, and then of course the physical infrastructure. If any of
those things lag behind the actual build out of the solar, then solar has
to slow down, right, It just can't, because you're now you're endangering
grid stability. So that's actually the answer to the question, how can they
keep it up or what kind of circumstances would allow them to not keep it
up. That's what would do it. All the supporting systems failing to keep
pace, which means that you introduce flexibility, which is a subject which is
very close to our part right now. And I guess it's probably easier in
China than elsewhere because you get your cattle and you'll bid which are already present,
and then a huge umpt fleet, probably one of the biggest in the
world. Those flexibility mechanism you talk about on serious services, do they stand
on their feets or it's more of a common control or how do they develop
as fast? Because I think we had what ten ge get out of batteries
into a twenty three, which is pretty phenomenon. Yeah, So all of
these are just like the power energy system itself, the markets that are going
to support this, the ancillary services market is also developing into a proper market.
When we talk about how we want to compensate load followers for load following,
how do we want to compensate capacity for being available. They're moving slowly
from this kind of idea of mechanisms where just like I passed costs to you,
thank you for being their coal generator, I will give you this much
money for doing that, And that's the first stage, and then you want
to see in a year or two or three that turn into a market where
you say battery, you're now competing against the coal generator, compete against the
pumped hydro power storage plant. Whoever can supply this capacity at the best price
wins the right to get these capacity payments. And if you can't do it,
you have to exit the system. That's where we're moving, and so
that's how you incentivize eventually capacity to build or exit the market. Where they
are right now, they're trying to just get the load followers. They're trying
to just get the capacity built, and the best way to do that is
give them guaranteed payments. A coal capacity charge was added at the end of
twenty twenty three. That made sense in the moment. I think that still
makes sense in twenty twenty four. Eventually, I'd want to see that turn
into a market competitive mechanism instead of a guaranteed payment. I'd like to see
a pump hydro competing with them. I think pump hydro would probably compete very
effectively against coal generators when it comes into a market like that. The flexibility
upgrades and the flexibility investments that China is making right now are really kind of
pioneering in the whole world. What they are required to build and do to
make sure that they're incredibly high intermittent generation exposed system is going to function or
even have a hope of functioning well. They're really required to pioneer what they
do with flexibility, how much battery is, how much pump storage, how
much, how even they have their coal plants operate. They operate coal plants
flexibly in China, not a lot of other countries do that. Everything that
they're doing is in service of this reality. They're going to have to face
a reality where wind and solar are the dominant capacity forms in their system.
David, I like the word to use pioneering because the other area that where
China is pioneering is in the electrication of transport. And I don't mean just
cars. I'm talking about buses, I'm talking about scooters. You know,
we see this massive build out of electric charging infrastructure on and on SOUSE.
You're talking a little bit about that as well, and how this fits into
this whole energy transition. Twenty twenty three was a huge year for evs.
Looks like twenty twenty four is going to continue to be massive. I think
I saw statistic recently that said over the first quarter of the year, maybe
fifty percent of all the vehicles in China sold were EV's, which is massive.
Believe really get percent. I believe that's the number I saw, and
so like, how do we get that? Obviously, it's really helpful that
you started from a place of electric scooters. And it sounds silly, but
I think it really is true that you had such this kind of understanding and
awareness that electric powered mobility is not a weird, niche application. It's just
a normal thing. It's just a normal part of life. Chinese cities have
had electric mopeds, electric scooters and people getting around using that as their primary
transports for decades. And you go to the countryside, of course, and
you know you have range considerations and people drive motorcycles. But in the cities
Shanghai, Beijing, other major cities like that, just tons of electric scooters
everywhere, and you know, maybe there's this part of that also where they
don't necessarily have this cultural historical association with like the macho car culture though the
electric vehicles where maybe sometimes they're rejected in the West as being like representative of
a lifestyle that it's not me and China electric vehicles are like cool the future,
forward looking, trendy, that kind of thing. It's just it's got
this totally different cultural connotation, which is obviously really helpful for their adoption.
And beyond that, of course, the electric vehicle companies are domestic. If
you buy electric, you're buying domestic. You're a patriotic consumer tesla of course.
But all the other major electric vehicles companies are Chinese, and surely that
also plays a role that certainly helps. There are two elements which for me
are the most important, even more than decombonization or digitization. The number one
is human capital, because you can't put an energy policy if you don't have
human capitalal and you have seen company which did not exists, oh well nowhere
in the radar ten years ago, whether it's BYD cattalev Gatun that's for the
batteries, Minyang gold Wing for the wind and they are the same policy in
Brazil in India. Where are those Brazilian and Indian champions? I don't see
them anywhere, but I see those Chinese technology everywhere. So probably took about
the human capital before all these top down plants, which frontly means nothing if
you're not have entrepreneur behind them. Yeah, it's not that industrial policy is
a great mystery. Many countries can institute an industrial policy, and they could
even maybe assign government funding and grants to back up that policy. But at
the end of the day, the people carrying it out are your engineers,
your STEM graduates, your innovators, and your scientists, your experimenters. Two
decades ago, three decades ago, China manufactured exactly what it was able to
manufacture because that's what it's human capital base was able to to create. And
now when you look at how many master's degrees and PhDs and chemical and material
and electrical engineering graduate every year from Chinese university, that there's millions of them.
Any problem in China that can be solved by throwing a thousand PhDs and
a billion yen at the problem will be fixed that way. We want to
innovate a new application in this car company, Let's just keep throwing smart people
and lots of money at the problem until it fixes itself. We don't know
how to localize nuclear technology components. Keep throwing smart people and money at the
problem until it sorts itself out. And China has the money and the people
that has the steen graduates to fix it that way, to approach problems like
that, that's a real luxury. Not everybody gets to do that, and
especially a lot of countries that see their human capital go elsewhere. But China
has been very proactive and very methodical about trying to ensure, especially in the
last few years, that it's human capital stays or if it goes away,
it comes back. Also, if you went to a top university abroad and
you want to come back to China to work, they'll give you a house,
they'll make sure your kids go to private schools, they'll make sure you
have you have state fundings that you can pursue your research, all this stuff.
Here's a great story. I encountered a taxi driver in Shanghai. He
said, oh, you're from the United States, so that's interesting. My
son went to Stanford. Oh wow, good for you. Your son went
to Stanford. How do you do that? He goes, Oh, the
Chinese Academy of Science is paid for it. Why did they do that?
He said, well, he wanted to study abroad, he applied, he
got accepted to Stanford, and then after they said, okay, as long
as you promised to come back to China after you graduate, We'll pay for
everything. You do your master's degree, you do your PhD in Stanford,
but you have to come back in China and work here when you're done.
And so he took it and he went he said, yeah, my son,
he works in Chinese Academy of Sciences. Now he had his full scholarship
paid stand for it. Because China saw it was worthwhile to invest in this
single human and then apply that to thousands or tens of thousands of people.
It's a very intentional strategy. The other aspect, because I said, there
War two. The one was human capital, but the you know one is
energy security, which is something that we felt in Europe with the invasion of
Ukraine, but they don't feel in the US thanks to the shade gas revolution.
So they don't understand or they probably forgot because they had the energy in
security twenty years ago. But in the mind of China, i'ving to import
twenty million barial level per day and this is really not even decreasing. That's
a huge level for all this energy transition. Yeah. Absolutely. I always
like to talk about the two themes of China's energy sector or the energy transition
one is decarbonization, which is ongoing, and the other is liberalization, which
is also ongoing. But then there's actually a third theme always lurking, and
that's energy security, and the other two can be sacrificed in a heartbeat if
it looks like energy security would be compromised because of the pursuit of decarbonization or
liberalization. Energy security is one of those kind of red lines in China,
along with food security, along with national security. Right there's certain red lines
in China, and energy security is one of them. Because when you talk
about a place like up north where it's very, very cold in the winter
and if you can't get enough electricity to be heating homes, or if you
can't get enough heating fuel to heat homes and people, you know, people
freeze to death. Or in the south where China is basically tropical, and
if you can't get cooling in the summer, then again you're talking about human
livelihood being affected. Energy security always takes precedence, and that really plays out
in how we see a lot of investment decisions happening in China. So if
I contrast to a place like Texas or cot is a very specific special kind
of grid system. And you could summarize the way ERCOT operates by saying,
the ideal type of electricity system is one that has just enough power just in
time, and if you have any more than that, you've been economically inefficient,
you've been wasteful. Okay, fine, that's one way of looking at
the world. China clearly has a different way of looking at the world.
It's more than enough power all the time. That's how China approaches energy security.
Will never flirt with insufficiency for the sake of economic efficiency. There will
always be sufficient power. David, I just have one question, is I'm
gonna put you on the spot, when do Chinese combon emissions peak? Well?
And the official number is twenty thirty, and there's a lot of good
evidence stacking up right now to say that it's going to be before that.
It's going to be well before that, And here we are in twenty twenty
four. I think it's not too aggressive to say that twenty twenty four is
the year. Now, we won't know until the end of the year.
If they flatten out this, then we get to point back at twenty twenty
three and we say twenty twenty three was the peak in twenty twenty four was
the start of the plateau, or hopefully we start declining. I don't dare
to say how quickly they'll decline, but there's a lot of not just me,
a lot of people out there looking at the structure of the Chinese electricity
consumption and saying, structurally, it looks like twenty twenty four has to be
the year. And I certainly hope that that's true, that this is the
year when all the renewables plus hydropower showing up and performing the way it's supposed
to, all combine to ensure that the extra consumption that happens in twenty twenty
four is fully met, or at least mostly met by enough clean generation,
enough clean power, so that we can point back to it and say,
look, coal, no additional call was consumed in twenty twenty four. That
was the peak six years in advance, and then we can start working on
the decline. Well, David, thank you so much for coming on the
show. Thank you so much for this optimistic message, which I kind of
share because there's never enough over precity of team tech in this world full of
fussil fuel. Thank you so much for coming on the show. Thank you
very much, David. And again I also on a backup at Lauren says
we look at China, I think very negatively and I like the way you
and this which is can be commissions is very close to Thank you guys.
Ben Afli here. Wow wow, wow, I learned so much. Yeah,
well, listen. The most amazing thing for me, Lauran is that
the people still have a backdated, old worldview of China and what they're doing.
And obviously there's a lot of negative press in and around China, Russia
getting together, etcetera, etcetera. And it's not we're not going to go
to politics, but you just can't ignore the elephant in the room, especially
the energy space, and it's China. If you look at the response from
the West, the US immediately very protection East and raising tariff full of the
place. Europe is in the middle. They don't know, they have a
bit of a collaboration slash soft protectionism with the Siabam. Europe still doesn't know
where to stand. It's tough. It's really tough. Thlough. If you
think the Europe's policy over the last seventy five years since the Second World War
is is make sure you do business with your enemies, because if you can
do business with your enemies, you're less likely to have trouble with them in
the future. And that's philosophy and policy has worked very, very very well.
But obviously since the Ukrainian crisis that's broken down. Yeah, one of
the elements is gonna be determinant in Europe is the fact that the current account
balance of Germany with China, we used to have a sizeable surplus for decades
now is going into a deficit. So we might see some more stringent policy
coming in Europe, which is sad because competition is good. Well, do
you know what I think? We just have to face the fact that what
the Chinese have done over the last twenty years is incredible, and that starts
with their investment and education, all the way down to taking risks in and
around, going into areas before I'm talking about growth, areas before other countries
have dollars. That's the reality of it. So the question we should ask
ourselves in Europe and in North America is what can we learn from their progress
in the last twenty years. Well, job, we could talk about China
for the next hour, but I really advise our listeners to go into the
LinkedIn page of Davich Fishman because you have a lot of fascinating analysis and we
thank Amunji for supporting our show. Absolutely, it's a good way to end
up my friend. Last thing for anybody who wants to partner with us,
we have a media kit at your disposal or just send us a main and
we'll provide you with the media kit. A job. I talk to you
next week, looking forward to it. Thank you for listening to Redefining Energy.
Don't forget to rate the show and subscribe on Apple Podcasts, Spotify or
the platform of your choice.